Understanding DeFi and Its Importance in the Crypto Economy

Decentralized Finance has been disrupting the world financial status quo based on a unique economic freedom approach.

Financial inclusion is the bane of every modern economy, such that people naturally try to conceptualize ways to generate potent streams of passive income while integrating the methodology of traditional finance. 

This has been in use for centuries and only modified by a more recent technology as the day goes by.

However, the advent of blockchain technology and by extension cryptocurrencies has seen an uptrend of developmental projects in the financial sector of the global economy. This has gradually transformed the way of doing financial businesses in recent times with the development of decentralized financial (DeFi) systems deployed on one of the major blockchain platforms.

What is Decentralized Finance (DeFi)?

DeFi (or “decentralized finance”) is a collective term for financial services on public blockchains, especially Ethereum. The deployment of DeFi products enables one to do most of the things that are applicable in the traditional banking sector like earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more

However, this is faster and doesn’t require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and open to all within a smart contract. 

What is the Importance of DeFi?

DeFi uses the basic principle of Bitcoin (which is digital money) and expands on it, creating an entirely digital alternative to traditional finance, but without all the associated costs (think office towers, trading floors, banker salaries). This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection.

What are the benefits of DeFi?

  • Open: DeFi grants anyone and everyone the opportunity to leverage the openness of the market such that you don’t need to apply for anything or “open” an account to get access. You simply get access by creating a wallet.
  • Pseudonymous: You don’t need to provide your name, email address, or any personal information. This gives the individual some level of privacy and freedom over their finances
  • Flexible: You can move your assets anywhere at any time, without asking for permission, waiting for long transfers to finish, and paying expensive fees.
  • Fast: Interest Rates and rewards often update rapidly (as quickly as every 15 seconds) usually in block time, and can be significantly higher than traditional financial markets.
  • Transparent: The blockchain which is an open ledger system grants everyone involved the opportunity to see the full set of transactions (This is not applicable to private corporations who rarely grant that kind of transparency to their customers)

How does DeFi work in principle?

A typical transaction with DeFi would involve the use of software called dapps (“decentralized applications”), most of which are developed and deployed on the Ethereum blockchain. Unlike the traditional bank system, there is no application to fill out or account to open. 

Here are some of the ways users are interacting with DeFi platforms on a daily basis: 

  • Lending: This is where an individual lends out crypto and earns interest and rewards every minute – not once per month like the traditional financial institution.
  • Getting a loan: An individual can obtain a loan instantly without filling in paperwork, including extremely short-term “flash loans” that traditional financial institutions don’t offer.
  • Trading: People can make peer-to-peer trades of certain crypto assets. Just like the way you could buy and sell stocks but without any kind of brokerage.
  • Saving for the future: Put some of your crypto into savings account alternatives and earn better interest rates than you would typically get from a bank. 
  • Buying derivatives: Make long or short bets on certain crypto assets. Think of these as the crypto version of stock options or futures contracts which is very profitable for those who have quality experience in trading such.

The creation of smart contracts, stablecoins, and lending and borrowing platforms, led to another important creation in DeFi: decentralized exchanges (DEX), which is another incredibly important component of decentralized finance. The entire DEXs saw over $1 trillion in trading volume in 2021 which is indeed an eye-opener for traditional financial institutions.

In conclusion, the opportunities around the understanding of decentralized finances in the crypto economy can not be overstated. Klever would continue to create educational content to impact the lives of our community and ensure the global community is truly financially free and empowered to achieve its financial goals in a Klever way.

It is indeed a Klever thing to do.

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Disclaimer: This article is for informational purposes only. The information does not constitute an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Klever.Finance does not provide financial, tax, legal, or accounting advice. There is no responsibility on the part of the company or the author for any loss or damage arising from or related to the use of or reliance on any content, goods or services mentioned in this article.

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